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Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. Partner Links. ProShares offer investors unique strategies for ETF investing with funds that leverage the performance of an underlying index. Discover more about it here. This enables traders to hedge their exposure to the market and even profit from the decline.
Traditionally, short-selling involves borrowing the asset in question from a broker, and selling it at the market price. In this case, the asset in question will be related to the housing market. This usually occurs when a homeowner is in foreclosure. What is actually meant by shorting the housing market is speculating that the price of houses will fall.
There is no way to directly short the housing market, so investors and traders will trade alternative assets such as real estate investment trusts REITs or shares in companies within the industry. As finding a broker who will provide REITs or shares available to short is difficult, most shorting is done with derivative products, such as CFDs and spread bets. With these products, there is no need to own the underlying asset in order to open a short position, as you are simply speculating on the future direction of the market price.
The most common way of speculating on the housing market is by investing in REITs — these are companies that buy income-producing real estate. There are a variety of different REITs, depending on what you want to focus on, including industrial buildings, residential, hotels, hospitals and student housing. But if you thought that the housing market was going to decline, you might choose to short-sell a REIT.
To start shorting REITs, you should:. Alternatively, you could practise short-selling REITs in a risk-free environment with a demo account or continue to learn about financial markets with IG Academy. Exchange traded funds ETFs are instruments that track a basket of assets — such as a stock index, the shares of companies involved in the housing market house builders, material suppliers, etc or REITs. You could then close your trade for a profit. There are also ETFs specifically made for shorting purposes, known as inverse ETFs — the price of these assets rise as the underlying market falls in price.
This means that any bearish investors and traders can immediately get exposure to a declining housing market. If you wanted to take a short position on a reverse ETF, you would do so in expectation the underlying market would rise in price. Finally, traders can choose to go short on shares of individual companies that are involved in the housing market and real estate. Homebuilding stocks are closely tied to the outlook for the housing market as a whole, as everything from builder confidence, labour costs and rising commodity prices can have an impact on housing prices.
For example, if commodity prices increase, it becomes more expensive for these companies to buy raw materials and their revenues would suffer as a result. The prices of homebuilding shares are seen as a leading indicator of the sector as a whole because if there is a squeeze on these companies, the price of houses could increase and buying could become less affordable. Although the idea of shorting the market has been glamourised by films like the Big Short, it is very much a risky business for a number of reasons.
For example:. Before you start to short-sell, it is vital to create a suitable risk management strategy, such as adding stops and limits to your positions. It is important for traders and investors to be aware of interest rates cycles. If interest rates are low, the cost of borrowing is less, and more people are able to afford mortgages.
This means that the housing market will likely boom, house prices will be higher, and companies will thrive. However, when house prices skyrocket, it can lead to a housing bubble and financial crisis. For example, in , in order to meet the demand for housing in the US, banks and mortgage brokers offered home loans to pretty much all applicants.
When the Federal Reserve Fed raised interest rates, the mortgage rates soared, and house prices plummeted as borrowers defaulted on their loans. This led to the financial crash. It is difficult to predict if and when a market crash will happen, which can make knowing when to open a short position difficult. This is why many traders and investors will perform both technical and fundamental analysis to identify possible turning points in the market.
Many analysts believe that if house prices and share prices do fall, it is likely that a strong rally will follow as sentiment improves. Just as house buyers and investors watch prices for a key level at which to enter the market, it is necessary for short-sellers to be aware of the same levels.
Knowing when to exit your position is absolutely vital. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information.
Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it.
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